Thursday, December 9, 2010

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On Monday, President Obama struck a tentative deal with Republicans that includes a payroll-tax cut for all workers in 2011 in exchange for extending emergency unemployment compensation for the next 13 months. Of the 19,000 unemployed in Santa Barbara County, 9,583 people receive unemployment benefits. In October, more than $11 million was paid out in unemployment benefits in Santa Barbara County. Farming, government, transportation, and the hospitality sectors make up the biggest areas of unemployment in the county. Santa Barbara currently has an unemployment rate of 8.9 percent.

Paul Wellman (file)

Lois Capps

Representative Lois Capps said that she favors the move to extend unemployment benefits and extensions because the people who receive unemployment checks put that money back into circulation. “Extending unemployment insurance isn’t just the right thing to do; it’s good policy,” Capps said in a statement. “Recipients of unemployment benefits use them immediately — to pay the rent and put food on the table — injecting demand into the economy.”

A recent study by Moody’s Analytics found that every dollar spent by the government for the unemployed produces an overall return of $1.61 for the economy. Capps’s press secretary, Ashley Schapitl, said that Capps disagrees with extending tax breaks for the rich because that money would likely be put into savings. “Giving tax cuts to the upper 2 percent would likely be saved and not be injected back into the economy,” Schapitl said. “We shouldn’t be borrowing money and increasing benefits to people of the likes of Warren Buffet.”

Despite Obama’s 2008 campaign promise to shut down Bush-era tax cuts for households earning more than $250,000 annually, he agreed to extend the breaks for two years, with the ability to extend unemployment checks to the 9.8 percent of Americans who are unemployed in mind. According to Schapitl, at least 95 percent of households in the 23rd District are below the $250,000 threshold.

“[Representatives Capps] is deeply dismayed that Senate Republicans are willing to hold tax cuts for more than 95 percent of families in California’s 23rd Congressional District hostage to give the wealthiest Americans a tax cut that will increase our already large federal deficit,” Schapitl said in an email. “She will scrutinize the White House proposal to determine whether the framework put forth does enough to help middle-class families to warrant her support, despite her opposition to continued tax cuts for the wealthiest 3 percent of the country.” Based on the Treasury Department’s preliminary estimates, the cost of extending the tax cuts is likely to range anywhere from $200 billion to $500 billion, depending on whose cuts are extended and for how long.

Obama’s plan would also renew jobless benefits for the long-term unemployed and grant a one-year reduction in Social Security taxes paid by workers but not by employers. Unless Congress takes action, this week would be the last week of extended federal unemployment benefits. Under his plan, unemployment benefits would remain in effect through the end of next year for workers who have been laid off for more than 26 weeks and less than 99 weeks. According to the Associated Press, on a national level, two-million individuals would have lost their benefits over the holidays without the extension, and seven million — 400,000 in California — would have done so by the end of the year. Obama’s proposal also would extend a variety of other tax breaks for lower- and middle-income families, including the Earned Income Tax Credit and the child tax credit.

The proposed Social Security tax cut would apply to virtually every working American. For one year, workers would pay 4.2 percent of their income, instead of 6.2 percent. In the coming weeks, Congress will vote on the White House compromise.

Comments

Proving that hypocrisy pays a good wage , Obama the de facto Republican has joined the GOP in extending Bush's unfunded welfare for the wealthy program . This proves deficit reduction is only important to politicians as a rhetorical tool .

It is amazing to me how quickly the electorate forgets that one month ago we, the Americans, gave the Republicans the majority in the House of Representatives and the ability to block any vote in the Senate.

Didn't we,the Americans, think for one minute that the Republicans would side with the welathiest 3% in this country and not the average working Joe.

The deficit could be significantly reduced if we, the Americans, stuck with our elected Predisent and gave him a chance to finish what he had begun.

The conpromise proposed by the President is for two years, in time for the next election. This election is not only for President but also for the House and Senate. It will be a long two years, but then maybe we, the Americans, will remember what we did to ourselves in this last election.

But again, I see the negative, because we, the Americans, have such short memories.

"...Capps’s press secretary, Ashley Schapitl, said that Capps disagrees with extending tax breaks for the rich because that money would likely be put into savings."

I can't believe Ashley's ignorance!

If it's put into a bank, doesn't the bank simply turn around and loan out that money (by a factor of nine!) to people who will inject it immediately into the economy? It's not like the money just sits in a vault doing nothing! Fractional reserve lending allows banks to loan out money by a factor of nine times their deposits, effectively making money out of thin air. And doesn't the bank make interest on these loans as well?

What if the rich invest the money into a business, or into the markets? How about if they invested it into municiple bonds? Isn't any of that better than simply forking it over to the government? The Government can not create wealth, it can only destroy wealth.

If you all hate the rich so much, why don't you just band together and ban all private property?

Um, no. The banks have not been turning around and lending the money. And giving money to the rich doesn't help the economy; it helps the rich. After all, they've had this tax cut for ten years. Look how well the economy is doing.

The rich funded the Tea Party movement so as to solidify control of Congress by the Republicans, whose sole principle is to protect the privileges of the wealthy at the expense of everyone else, including, as we've seen in just the last few days, seniors, children, veterans, and 9/11 workers.

The deficit question is used to trump every attempt to help the economy and its victims but mysteriously disappears as an issue when it comes to promoting the interests of the wealthy. This isn't about hating the rich, but about deploring the cynical hypocrisy of a Republican party that puts the interests of a well-connected few above the national good.

The banks don't make money if they just sit on their deposits and do nothing. For every dollar they hold, they can loan out nine that never existed! They are literally able to make money out of thin air by a factor of nine.

And besides we are not talking about giving money to the rich, we are talking about letting them keep what they already earned!

Compare that to the paltry $1.61 return on every dollar spent on the unemployed. If that's so effective why not just pay everybody to not work?

Your ideas are interesting, Disturber, but not supported by current facts: banks are dragging their feet when it comes to lending in spite of favorable government treatment, and at lower levels than in past recessions:http://www.businessinsider.com/nonfar...

Why not quote the full statement? "The Moody team tested the economic impact of a number of government programs, including making the Bush tax cuts permanent. They found that unemployment benefits have the biggest bang for the buck. For every dollar spent on unemployment, the economy gets back $1.61. The return on tax cuts is much smaller."

So, in addition to adding enormously to a deficit problem that conservatives invoke to oppose any program that tries to help people other than the rich, the claim that tax cuts for the wealthy are a better investment in aiding the economy is a lie, which of course doesn't keep it from being repeated by dupes suckered by the right-wing media and the mainstream echo chamber.

It's basic math. If I have one dollar, and banking practices allow me to loan out 9 times that amount, I've made 9 dollars out of thin air, plus interest. Even if I tighten up my loaning practices and I only loan out two dollars for every dollar I hold, I've now created two dollars out of thin air, plus interest.

That still beats the $1.61 return per dollar the above article is touting for unemployment benefits.

And that still assumes that the rich won't do anything with their money except to save it.

With regard to the chart you reference; wouldn't contracting the money supply by increasing taxs only exacerbate the trend? How does putting that money in the hands of the government benfit the economy?

Is it not true that any money kept in the private sector buoys us all?

May I also draw your attention to the comments section of the refernced article and chart:

Barack Obama on Aug 10, 5:13 PM said: No surprise here. I, myself, wouldn't borrow to invest as long as I'm in charge. Even if I knew how to invest in something

The issue not whether money sitting in a bank is doing anything, but whether giving tax breaks to the wealthy, whatever they choose to do with the money, is more effective in stimulating the economy than giving aid to the unemployed. You clearly think that giving it to the wealthy will produce a ninefold, or maybe twofold, increase in the money supply, and this will somehow provide a greater stimulus than using it to aid the unemployed. The rest of the quote, if you had bothered to check, refutes your conclusion: "Unemployment benefits have the biggest bang for the buck....The return on tax cuts is much smaller." Now presumably the analysts who came to this conclusion are aware of the effect of giving rich people money to put in the bank. So please refute their refutation of your fantasy math (money in a wealthy person's bank account has a greater multiplier effect than money in the hands of an unemployed person) if you can.

Money in the public sector travels thru the overall economy than millions and billions just sitting in a bank vault.And sorry disturber, one dollar doesn't magically become nine unless you're printing the additional eight. Its fake money, it has never existed, it never will except in a ledger. And this false "money" is what has led to our decline.At least you've chosen an appropriate name Disturber.

"...The table below displays how loans are funded and how the money supply is affected. It also shows how central bank money is used to create commercial bank money from an initial deposit of $100 of central bank money. In the example, the initial deposit is lent out 10 times with a fractional-reserve rate of 20% to ultimately create $400 of commercial bank money. "

"...The process begins when an initial $100 deposit of central bank money is made into Bank A. Bank A takes 20 percent of it, or $20, and sets it aside as reserves, and then loans out the remaining 80 percent, or $80. At this point, the money supply actually totals $180, not $100, because the bank has loaned out $80 of the central bank money, kept $20 of central bank money in reserve (not part of the money supply), and substituted a newly created $100 IOU claim for the depositor that acts equivalently to and can be implicitly redeemed for central bank money (the depositor can transfer it to another account, write a check on it, demand his cash back, etc.). "

"...At this point, Bank A now only has $20 of central bank money on its books. The loan recipient is holding $80 in central bank money, but he soon spends the $80. The receiver of that $80 then deposits it into Bank B. Bank B is now in the same situation as Bank A started with, except it has a deposit of $80 of central bank money instead of $100. Similar to Bank A, Bank B sets aside 20 percent of that $80, or $16, as reserves and lends out the remaining $64, increasing money supply by $64. As the process continues, more commercial bank money is created. To simplify the table, a different bank is used for each deposit. In the real world, the money a bank lends may end up in the same bank so that it then has more money to lend out."

"The Moody team tested the economic impact of a number of government programs, including making the Bush tax cuts permanent. They found that unemployment benefits have the biggest bang for the buck. For every dollar spent on unemployment, the economy gets back $1.61. The return on tax cuts is much smaller." Which part of this statement do you dispute?

So it's Disturber, qualifications unknown, vs. Moody's Analytics, a leading provider of research, data, analytic tools and related services to debt capital markets and credit risk management professionals worldwide. The company's products and services provide the means to assess and manage the credit risk of individual exposures as well as portfolios; price and value holdings of debt instruments; analyze macroeconomic trends; and enhance customers' risk management skills and practices.

Moody's publishes investor oriented credit research, including in-depth research on major debt issuers, industry studies, special comments and credit opinion handbooks. While research, analysis and data are delivered through a number of channels, most of Moody's clients use www.moodys.com for access to such services in a real-time environment.

Moody's maintains offices in most of the world’s major financial centers and employs approximately 4,300 people worldwide, with a presence in 26 countries. The firm also has expanded into developing markets through joint ventures or affiliation agreements with local rating agencies.

Customers include a wide range of corporate and governmental issuers of securities as well as institutional investors, depositors, creditors, investment banks, commercial banks, and other financial intermediaries.

You can defend trickle-down economics all you want; for most folks the last 10 years offer enough proof that its crap.

Regardless, this deal is the height of fiscal irresponsibility; we will be financing this deal entirely with debt. Think about that; your kids and mine will be paying for all those cool tax cut extensions to folks that make $millions+ per year... with interest! Happy about that are you?

Extending unemployment is just The Right Thing to do. Just tell yourself "there but for the Grace of God go I" and be thankful you don't have to try make it in on $300/week (if you're lucky).

I'm not comparing ROI at all, so it doesn't matter what Moody's says about unemployment spending vs tax cuts.

Ashley Schapitl says that Lois Capps "disagrees with extending tax breaks for the rich because that money would likely be put into savings." This implies that the money sits in a vault and does nothing. But that can't be true, otherwise the bank wouldn't be able to pay you interest on your deposit!

Well lets assume Lois and Ashley are correct that the rich would just save the money that would have been taxed. That money is multiplied exponentially by what Wikipedia describes as Bank's abilility to "to create money virtually at will..." This is done all of the time and is the basis of the modern banking system.

As described in my previous post, a $100 deposit in a bank becomes $400 in the economy. Clearly this is a better outcome that the 61 cents ROI spent on unemployment. So much so that it could eliminate the need for unemployment spending due to positive economic growth!

That's because banks only need to keep a small percentage of it's deposits on hand, as little as 10% in the U.S. system. In other words, for every dollar deposited, a bank can loan out nine times that amount and create an "IOU claim (with the Federal Reserve) for the depositor that acts equivalently to and can be implicitly redeemed for central bank money (the depositor can transfer it to another account, write a check on it, demand his cash back, etc.)."

There can be no denying that this is a greater factor of economic growth!

The tax cuts, including those for the wealthy, have been in place for 10 years. During these 10 years, net job growth has been dismal, to put it kindly. Clearly, the tax cuts do not have the effect you are so stridently believe in.

Borrowing hundreds of billions of dollars to give tax breaks to the wealthy who need it least, and then asking future generations to pay for it with interest is insanity, plain and simple.

We are not borrowing money to give tax breaks to the rich; we borrow money to fund government spending!

We are debating allowing the "rich" to keep the money they already earned, (along with everybody else), and thereby keep that money in circulation and multiplying. That money can stimulate greater economic activity which results in an exponentially larger revenue stream for the government, than simply raising taxs.

Here's another fact you should be happy to hear:

After the Bush administration tax cuts, there were 52 months of continuous job creation, and 52 months of job creation is the largest such period in American history.

So if tax cuts for the rich are so bad for the economy, wouldn't tax cuts for the middle class be equally disasterous? Using your logic, don't we also need to borrow money to fund the middle class tax cuts too? Isn't that going to have the same effect on future generations, sticking them with the bill for middle class tax cuts plus interest?

If all of this is so wrong, then why is President Obama and V.P. Biden fighting so hard for tax cuts for all?

The trouble with your reasoning is twofold. First, treating IOUs as cash fails when the notes are called. If you have created $400 or $900 in liquidity through IOUs via the injection of $100 in actual cash, then any run on the notes creates a deficit. Look at what happened with the Credit Default Swaps, an interestingly parallel situation.

As for the second issue, middle-class tax breaks are more stimulative because that income bracket has a smaller proportion of discretionary budget, i.e.; they spend more and save less of their money.

I agree with you that there is an element of risk with the fractional reserve lending system. It doesn't matter though, unless everybody tries to take their money out of the sytem at the same time, in which case you have a "run" on the banks, and usually a bank holiday ensues. Nevertheless, that is the way modern money supply operates, both here and abroad. Would you suggest we return to the gold standard and ban fiat currencies? After all, haven't all fiat currencies failed eventually?

You say the middle class tax breaks are more stimulative because they have to spend a larger portion of their income than they save. Doesn't this falsely assume (again) that money sitting in a vault does nothing, when in actuality a Bank can create at will up to 9 times that amount out of thin air, plus interest? You make this claim despite your acknolwedgement in your previous thought that fractional reserve lending poses a risk.

I fail to see the relationship between relative wealth, tax cuts, and the net effect on economic growth. Why does it matter if the money is saved or spent by someone rich or poor? Unless the money is being stuffed in a mattress, it's being multiplied exponentially by fractional reserve lending or circulation through the economy.

Isn't the real stimus benefit of tax cuts on the middle class realized in terms of voter loyalty? After all, there are more middle class voters than wealthy voters. Doesn't a bigger paycheck (due to tax cuts) have a greater effect on voter loyalty than the economy?

The risk associated with a highly-leveraged liquidity scheme has already been realized in the crash of 2007-8, and I doubt the nine-times multiple, except in extremely leveraged cases where the risk is also extreme. A run on the bank is not assuaged by a bank holiday, no matter how much we wish it were.

When private investors will not fund start-ups, and banks will not lend, the government will and does. This is manifested in infrastructure development projects and green technology investments (DOE, SBIR, NSF, and various military R/D grants). The wealthy people and companies of this nation are very happy to sit on their cash right now, and that is what they are doing. Banks are over-complying with their reserve requirements, sitting on cash and not lending. In many cases, they are sitting on taxpayer funded TARP money.

This is a perfect time for the government to raise taxes on the wealthiest taxpayers and corporations. Give them a write-off for hiring and keeping new workers, but no more of this trickle-down wait-for-the-manna-from-heaven baloney. Please.

The real problem with your theory is that $1 in a bank does not create 9 new dollars, it creates 9 dollars of debt. That debt, plus interest, has to be repaid to the bank. The bank makes money off of this deal, but they are in the wealthy top 2% targeted by this Republican/Corporate tax break scam in the first place. So, just to recap, we give a tax break to a millionaire who puts it in another millionaires bank who loans it out, 9 times, with interest, and posts the largest profits in history. And this is supposed to help who?

95% of families in the 23rd district are below the 250K salary threshold?? I wonder where that data came from? It is definitely incorrect. But then it's par for the course for liberals to lie and exaggerate.

Why do you find that difficult to believe? $250K/year is a lot of money. The 23rd extends quite a ways up the coast... not all of it looks like Montecito, or Summerland. Think about places like Santa Maria, or Guadalupe... or heck, even most of SB.

For calibration purposes, the median household income in the 23rd is about $44K (according to wikipedia). Within SB county (part of SB county is in the 23rd), the median is about $59K/year (census data). So, the statistic quoted in the article doesn't seem far fetched at all.

You say now is the time to raise taxes on the wealthiest taxpayers and corporations.

But corporations don't pay taxes. They just pass the expense on to the consumer, meaning the little guy. Or they cut back on benefits to their employees, or trim their workforce, who once again are most often the little guys. Or even worse, they move their business out of state or out of the country to an area that has a more favorable tax environment.

samiam, if you are multiplying the money supply by nine times, then everybody in the society benefits because that money passes through the hands of merchants and service providers, benefitting the little guy.

Corporations pay zero tax unless they have profits. If they have profits, they are not likely to raise prices unless they are willing to tinker with the supply/demand ratio.

Profits are net of salaries and expenses. The salaries that have risen the most in the past 40 years are those paid to the top executives, who make on average 400X more than the average worker. In 70's, the ratio was closer to 40X. In spite of that, the real income of "the little guy" - his buying power and standard of living - has been stagnant for almost 15 years.

In the early 1950's, revenue from corporate income tax was close to that of individual income tax totals. Now, it is only 15%, while income tax from individuals is 85% of the total.

In this same time period, our largest corporations have moved jobs to cheap labor markets overseas, been granted the right to anonymously influence elections with their money, and fought hard to block the emergence of competitive new domestic industries (green technology) that would help "the little guy."

I don't know where your "nine times" value comes from. Your earlier example claims a 4X multiple based on the valuing of IOUs and writing checks against them.

This is not "multiplying the money supply" if there is any chance of the IOUs being called, or in the present situation. Right now, the TARP money banks have received has been allocated to reserves and to the purchase of Treasuries, not making loans to help start-up small businesses (the acknowledged prime generator of new jobs).

Simply put, the "money supply" is being hoarded, not put to work. Tax incentives should be offered for the use of the money supply that helps create jobs.

I see several macro-economic trends at the moment; (1) extremely high levels of personal debt in this country (I believe the current number is something like $10T, up from $4T a decade ago but down from a high of $14T... I think these numbers come from Barrons), 2) very high levels of excess production capacity (hence high unemployment), and (3) extremely high levels of wealth and income inequity.

The high levels of personal debt means that consumer demand won't be picking up anytime soon. This is reflected in the high levels of idle production capacity. Also note that in the aggregate corporate profits have never been higher and companies as a whole are sitting on huge piles of cash (about $2T if memory serves).

So, if I were an investor, either through a third party (bank) or directly (stock purchase, for example) where is the growth that would fuel a return on my investment? There is little in the domestic economy to drive an expansion at the moment (I'm excluding direct government stimulus). Purely as an investor, I'd seek an economy that has growth... the Far East, Brazil, etc. Not the U.S.

As an aside, corporate profits can be (and is) used to buy back stock (this does not help growth). Only plowing those profits back into the company would help the economy... but why would you do that when you have excess capacity?

All is not lost, however. What can be done is to pave the way for future growth. This can be done by (1) paying down the debt (less market distortion in the future), and (2) pay for things that will improve productivity... things like education, infrastructure, R&D, and so forth. This is where tax policy comes in.

So, it seems to me that while large cuts in corporate taxes would be good in the long run, right now would not do much for the economy as a whole; too much excess capacity already since there is no real demand. Extending tax cuts to those that can afford to invest will not spur growth either for the same reason, and at least part of that money would go toward investment in economies that are growing at the moment, at least in the short term.

Plus, under the proposed plan we'd just see another $1T or so of additional debt.

This is, of course, just one person's opinion; but I'm trying to be logical about it. Sorry about the long-winded response.

Having worked in the banking industry for most of the 90's I have a hard time believing that only 5 percent of the district is over 250K. That's the cost of a lot of mortgage payments for a year in this area, not to mention the operating costs of small businesses for ppl filing as individuals.

I'd recommend you go to www.census.gov, and check it out. Its fascinating all of the demographic data they have, and the website has some nifty tools to help a person make sense of it all.

Bottom line is that while there are definitely small regions within the 23rd congressional district where incomes are quite high, there are many more regions within the 23rd where incomes are quite low.

I guess what you mean is that only 10% is sat upon as reserves, while 90% is out working? The trouble is that 10% is the minimum, and banks these days do not lend out 90% of deposits, or TARP money either. They have been buying Treasury Bonds. You should go to your local bank and discuss a line of credit or a loan for a new small business - you will be amazed at how little help you can find there.

So, in other words, the money saved at the lower marginal tax rate is mainly lent to the government. Instead of reducing the debt, this increases it.

You may not realize this, but all Federal Reserve notes (dollar bills) are debt, and if you payed off all of the debt, there would be no currency in circulation. That's because the Federal Reserve is a private banking concern that charges the U.S. government interest for the use of it's Federal Reserve notes. Consequently, the total amount of money owed to the U.S. debt always exceeds the amount of U.S. currency in circulation.

You also deny that fractional reserve lending practices are "multiplying the money supply" - if there is any chance of the IOUs being called. You fail to take into account that the money supply is composed of both central bank notes (all money created by the central bank regardless of its form, including banknotes, coins, electronic money through loans to private banks) and commercial bank notes ("IOU's, or "money created in the banking system through borrowing and lending).

What we are talking about in the case of a run on the banks is an inability to meet the demand for "central bank notes." In no way does this negate the creation "commercial bank money," which is simply a charge on account.

It bears pointing out that most of the "money/debt" that exists in the system only exists as an entry on a ledger account, or commercial bank money. While this "money/debt" is loaned out, it only exists as a "charge" on a ledger account(commercial bank money). However, it's paid back with actual central bank money, and as a loan is paid back, the commercial bank money disappears from existence (ie, the "charge" has been paid back (or discharged) in the form of central bank notes.

So as you see, fractional reserve lending does multiply the money supply by freeing up capital for use (creating a charge), and later "discharging" the debt on account with a payment plus interest in Federal Reserve Notes.

You said that you didn’t believe in trickledown economics, so why would you have the government invest in private industry (education, infrastructure, R&D) when it could just give that money to the poor, and let them decide where the money should be put, and allow it to trickle up?

Also, why should tax dollars be funneled to these industries, if private investors shy away from the risk? Doesn't that just put more federal tax dollars at risk of waste and fraud?

Also, you point to economic stagnation caused by high personal debt and idle production capacity, along with a stockpiling of corporate wealth. But aren't corporations sitting on this money due to the economic uncertainty caused by the failure to pass a federal budget, a still undecided tax policy just two weeks from the start of the New Year, and the unknowns caused by the Federal Healthcare Mandate?